Cost Basis Methods
Last updated
Last updated
We will demonstrate cost basis methods using the following example:
On 09/22/2017 Dave bought 1 BTC for 2,000 USD.
He buys 2 BTC for 5,000 USD on 01/06/2018 and then buys 1 BTC for 8,000 USD on 04/19/2018.
On 05/03/2018 Dave sold 1 BTC for 4,000 USD.
To calculate his capital gains for this disposal, he must decide his cost basis.
Buy
09/22/2017
1 BTC
2,000 USD
2000 USD
Buy
01/06/2018
2 BTC
5,000 USD
5000 USD
Buy
04/19/2018
1 BTC
8,000 USD
8,000 USD
Sell
05/03/2018
1 BTC
4,000 USD
???
Here’s how different cost basis methods would affect Dave’s capital gains…
Last In First Out
Assumes the last assets you bought are the first assets you sold or exchanged. Using this method your gains are calculated by using the price you paid for the most recently purchased assets and the asset price at time of disposal.
The last coin was bought on 04/19/2018 for 8,000 USD, so Dave's cost-basis is 8,000 USD
4,000 - 8,000 = -4,000 USD (loss)
First In First Out
(Default method by the IRS)
Assumes that the first assets you purchased are the first assets you sold or exchanged. So, using this method your gains are calculated using the price paid for the oldest assets in your portfolio, and the asset price at the time of disposal.
The first coin was bought on 09/22/2017 for 2,000 USD, so his cost basis is 2,000 USD.
4,000 - 2,000 = +2,000 USD (profit)
Highest In First Out
Calculated using the highest purchase price first, generating the lowest total gain.
The highest purchase price was on 04/19/2018 for 8,000 USD, so his cost basis will be 8,000 USD.
4,000 - 8,000 = -4,000 USD (loss)
Lowest In First Out
Calculates this highest total gain by using the lowest purchase price first.
The lowest purchase price was on 09/22/2017 for 2,000 USD, so his cost basis will be 2,000 USD
4,000 - 2,000 = +2,000 USD (profit)
Recap defaults to FIFO for US users as this is the IRS preferred approach, however you can opt to change this in Settings. Before using any of these methods please consult a tax professional.
